Why I think you should start paying attention to US cannabis reform via /r/wallstreetbets #stocks #wallstreetbets #investing

Hey everyone!

Before reading, please understand the risks of investing into a fledgling sector. It’s all speculative at this point, always be aware of your risk tolerance, time horizon and how much volatility you can stomach. Always do your own research and read all public disclosures before investing.

Edit: If you’re unsure of your risk tolerance here’s a link to an investment risk questionnaire. Just my opinion, but I highly recommend against buying cannabis stocks at this time unless you’re at least “very aggressive”. If you complete it, details are on pg 5.

I’ve been following North American cannabis reform for several years now, my first investment into the sector was just before legalization in Canada. The potential for the American market is enormous (10-12x Canada’s). I’ve read many different projections for the sector and they range from $70-$100b+ by the late 2020s. A market that size will support some very large valuations in the future.

As it stands today, the US senate has been the holdup on reform, but Chuck has made multiple statements that he plans to show us legislation in April. As majority leader he sets the legislative agenda, definitely someone worth paying attention to if you invest or plan to invest in the sector. There’s a big appetite for reform on both sides of the aisle, so even if POTUS threatens a veto (highly unlikely imo) congress can override it.

I’m not going to endorse any specific company or business model, that’s outside the scope of what I want to discuss today. I will say, I think it’s important for everyone to research the Canadian and Oregon markets as a case study before investing. Oregon is the most mature and saturated cannabis market in the world, it gives us a glimpse into what the future may hold.

One thing that’s become clear is flower quickly becomes commoditized (as in Canada and Oregon) and margins crash, this has caused many headaches for Canadian producers (I don’t own any Canadian cannabis stocks anymore). The gross misallocation of capital by many of these firms has valuable lessons to teach.

Imo the future of the industry will be those companies that focus on branding (very important), distribution and higher margin products like edibles, oils etc…

I believe a well run, scalable wholesale business (focusing on edibles, oils etc…) with strong branding and distribution can achieve gross margins of 45-55% +

Important things to consider when researching cannabis companies (my opinion):

The most lucrative target market from what I’ve read will be female head of household.

Capital allocation strategy. Make sure they have experienced management that can allocate capital efficiently. When Congress moves on banking reform the industry will be flooded with cash, many inexperienced management teams are going to struggle to scale quickly and efficiently (Canada has many examples)

The business plan & an outline of how they plan to scale in the future. Make sure you understand the business you’re buying into.

The CEOs & senior management’s compensation plan. It’s wild to me how many CEOs in the sector have set themselves up with lavish compensation plans while their businesses hemorrhage money. Look for management teams whose incentive structure lines up with shareholder interests. Or better yet, executives who are buying the stock with their own money.

Personally, I eliminated businesses from my list who had numerous execs (or the CEO) who worked in the illegal sector. No judgement, I just don’t want to invest money with someone who spent their time working in a grey or black market. Too many bad habits develop imo and transparency doesn’t become part of the culture. Another lesson learned from the Canadian market 🤣

This is all just my opinion, please take it with a grain of salt lol. I’m comfortable with high risk, highly volatile investments but they aren’t for everyone. Please know your risk tolerance, that has the single biggest impact on your success when investing.

Would love to hear everyone else’s thoughts! As things move forward I may write more posts on the subject (assuming you guys like this).

Hope everyone has an awesome day!

Submitted March 07, 2022 at 06:28PM by NineteenEighty9
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